Should You Pay Premiums In Advance, Here Are The Benefits And Disadvantages

When it comes to managing insurance policies, one of the key decisions policyholders might face is whether to pay their premiums in advance or make regular payments.

One reason why you may want to put your money in advance is the possibly unforeseeable changes in your financial situation later, such as the non-availability of funds during the due date of the premium payment and/or an attractive discount to incentivise pre-payment. 

On second thought, you might also consider against making such advance payments. One reason what may deter you from making such an advance payment would be gaps in information on what is being offered and concerns related to refund and/or policy change during the prepaid period.

We posed 10 frequently asked questions to experts to help clear your doubts on advance payment of premiums.

1. What kind of discounts can I expect if I pay my insurance premiums in advance? Are these savings significant enough to justify the upfront payment?

For both health and life insurance, paying premiums in advance can offer certain discounts, often ranging from 2-5 per cent. These savings stem from the insurer’s ability to invest the lump sum received upfront, which reduces administrative costs and enhances cash flow. 

Says Rakesh Goyal, director, Probus Insurance: “While the savings might not appear significant on smaller policies, for larger sums, the cumulative savings over time can justify the upfront payment, especially when coupled with the potential to lock in lower rates. However, this completely depends on the plan and the insurer you have opted for.”

2. If I decide to switch to a different insurance provider after prepaying my premiums, what happens to the money I have already paid? Will I be able to recover it?

If you have prepaid your premiums and choose to switch providers, the handling of the prepaid amount depends on the insurer’s policies and the type of insurance. 

Adds Goyal: “In health insurance, switching providers might mean losing a portion of the prepaid amount, as refunds are often calculated on a pro-rata basis, and administrative fees might apply. In life insurance, most providers offer a surrender value or a refund of the unused portion of the premium, but this can be subject to penalties or reduced amounts.”

3. Will paying my premiums in advance protect me from potential rate increases or changes in my policy terms? How does this work in practice?

Paying premiums in advance generally locks in the rate for the duration of the pre-payment period, thus protecting you from potential rate increases. 

“This is particularly advantageous in life insurance, where policyholders can secure a consistent rate for a number of years, regardless of any changes in health or age. In health insurance, while the prepayment locks in your rate for the covered period, insurers still reserve the right to adjust policy terms annually. So, the prepayment may not protect you from all changes,” says Goyal.

So, you must check with the insurance provider about the terms (if any) before making any payments.

4. What are the common advantages and disadvantages associated with paying premiums in advance?

Apart from the discounts, many people are concerned about the long-term commitment of premium payments. They want to exhaust their financial responsibilities when they are earning well, so that there are fewer financial dependencies as they grow older. It’s similar psyche to a large number of customers who use their bonus or a windfall gain to prepay home loans. 

Says Mahavir Chopra, founder of Beshak.org, an insurtech platform, “The negative aspect of paying a premium in advance in life insurance is that in the event of an early death, the advance premium does not get refunded.”

Says Shilpa Arora, co-founder and COO of Insurance Samadhan: “There is no benefit of paying in advance except that the coverage is ensured for the given period and there is no lapse. There is a cost of money and interest. You have 30 days grace period to pay your due premium. So, you may consider linking your credit card so that you do not miss paying your premiums.

5. How would my beneficiaries or I be affected if I were to pass away or my policy was terminated after prepaying premiums? Will the prepaid amount be refunded or transferred?

According to Chopra in the case of an individual health insurance policy, one can request a refund of the premium for the upcoming years.

“In all other insurance policies, the insurer will pay the sum insured. There will be no return of the advance paid,” says Chopra.

Arora adds: “In case of death, the second-year premium paid will be refunded. However, in case of cancellation, you may get premium after deductions.”

6. Can paying my premiums in advance offer any tax benefits? 

There are no particular tax benefits associated with advance payment of premiums. 

However, Chopra says that policyholders can pay an advance premium to the extent of the deductions available under each of the 80C and 80D sections of the Income-tax Act, 1961 under the old tax regime.

7. How can I assess whether the convenience of paying in advance is worth the potential risk of overcommitting my funds?

According to Arora if the insurer is offering a discount on the premium, then one can calculate whether it is worth paying premium in advance vs the return on investment elsewhere.

Chopra adds that policyholders should evaluate the trade-off between convenience and discount due to advance payments, versus losing out in case of an early death. 

“If one is confident about being able to pay the advance premiums over the years and wants the psychological comfort of paying off a financial commitment early, then it makes sense. For all others paying regular premiums is a better option,” he adds.

8. If I pay my insurance premiums in advance, will it have any impact on how claims are processed or settled?

No, paying premiums in advance will not impact your claim processes or settlements.

9. Are there any opportunity costs associated with paying premiums in advance?

Yes. Arora explains this with an example.

“Money has a cost. A systematic investment plan (SIP) of money for 12 months would give more money in pocket over paying a premium. Let us say your premium is Rs 1.20 lakh per annum, then one may do an SIP of 10,000 per month which may give Rs 1.30 lakh after 12 months, rather than paying the premium in advance,” Arora says.

10. What should I consider regarding inflation when considering paying premiums in advance?

Chopra says one can do a simple math.

“Individuals can do a simple calculation on a spreadsheet to see the difference in the present value of payments made in advance versus those made in instalments. By and large, the difference may not be material,” Chopra adds. 

Final Word

Ultimately, the decision to pay premiums in advance depends on individual circumstances and financial priorities. Therefore, next time you are being asked to pay premiums in advance, ask these questions to your insurer for clarity and to better understand the financial implications.